There’s been much ado recently about how a change in oil taxes might impact the state’s credit rating.
The bottom line is these stories (Analyst says state’s bond rating could be at risk if oil tax cut, Sept. 29) and accompanying political pronouncements are overly simplistic, disingenuous and ignore reality.
It all started when Senator Bill Wielechowski asked the Legislative Research Services to review what impacts the governor’s legislation to change the state’s oil production tax might have on Alaska’s credit rating. A state analyst wrote that there could be a negative impact if the State of Alaska returned to the days of budget deficits.
I don’t think anyone would argue with that. A more important analysis would be to review the fundamentals of Alaska’s fiscal policy and how that impacts our future financial stability.
We all know the oil industry pays the bills and represents over one third of our economy. For this, as a state, we are incredibly fortunate. But, that is not a given going forward. There are escalating warning signs that we must respond to if our economy is to remain strong.
The greatest concern is the continuing decline of North Slope oil production. Since ACES passed in 2007, average barrels produced per day have declined about 200,000 to an average per day flow rate in 2011 of 568,500, a decline of 26 percent. A new report indicates it dropped 7.45 percent last year, worse than predicted – and it is expected to decline more than eight percent this year. Never before has the oil flow in the trans-Alaska pipeline been as low and declining at such a rate as it is today. At $90-barrel oil, this decline means the state is collecting $3.45 million less a day than it did a year ago. That’s a number that should get everyone’s attention.
The only way to stem the decline in oil production is to generate new investment. The state is not going to make the investment. Nor can you and I make the investment. It will require the oil companies to more than double their capital investment in the legacy fields to achieve meaningful increases in production.
The good news is we have lots of oil left on the North Slope and lots of capacity in the pipeline to ship it to market. The bad news is Alaska is simply not as attractive a place to invest as other oil provinces. Our cost structure is much higher than most other parts of the world but the primary reason is our oil tax policy, ACES. As international oil consultant Pedro Van Meurs puts it: “the combination of high tax credits and high tax rates, which we have now, is not a sound proposition.” Finding a remedy will be essential for the long-term health of our economy, and I would add, the state’s credit rating.
Since ACES went into effect, we’ve watched oil production slide about 26 percent, while state spending has increased approximately 60 percent. Ever growing spending levels are simply unsustainable, particularly with the impending crisis of declining oil production. That paradigm, among all others, poses the greatest threat to Alaska’s credit rating.
The governor’s tax reform bill includes critical changes to the current punitive progressivity tax policy. It’s one avenue to fixing the production problem. There are others. As a founding member of the Make Alaska Competitive Coalition (MACC), I can tell you that MACC doesn’t care what vehicle is used as long as it takes us to a sustainable solution and increased oil production.
Alaskans must come together right now and find an answer to resolve the fundamentally unhealthy position in which we find ourselves. It is imperative, for Alaska’s economic future, that we become more competitive, attract new oil industry investment and stop the oil decline.
Marc Langland is the chairman, president and CEO of Northrim Bancorp. He is also co-chairman of the Make Alaska Competitive Coalition.
Visit: http://www.MakeAlaskaCompetitive.com
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